Overview: Key factors that led to the export ban of US crude oil

In the 1975, under the Energy Policy and Conservation Act, Congress made it illegal to export crude oil that was domestically produced, in the absence of a license.

Two reasons are usually cited for the export ban. First, in the 1970s, several price controls were slapped on crude and refined products. This was done so as to avoid inflation. The export ban was further proof of the governments’ fear of inflation. Second, Alaska’s North Slope was a newly-found oil discovery, and to prevent it from being sent to the higher-priced Japanese markets, instead of the U.S. West Coast, the export ban was a suitable choice. Therefore, the ban was put in place to conserve domestic oil reserves and discourage foreign imports.

However, in the early 1980s, oil price controls were abolished and so was the ban on exporting gasoline and other refined products. The ban on exporting crude oil though, remained. To export oil, producers needed export licenses from the Commerce Department, but these have been sparse over the past years. Exports of crude oil peaked at 104 million barrels of oil in 1980, but have since fallen to 43.8 million barrels in 2013.

Until 2005, when domestic oil production was declining and the U.S. was in fact importing almost 60% of its total consumption, there was no reason to re-examine the export ban. However, since 2008, oil production has significantly surged.

The U.S. Energy Information Administration (or EIA) forecasts that 2014 crude production will be 8.42 million barrels per day. This significant surge in oil production has initiated several discussions regarding the lifting of the export ban as oil producers are of the opinion that they will benefit from exporting oil to countries where they might receive better prices for their production.

Oil-weighted names such as Continental Resources (CLR), EOG Resources (EOG), Oasis Petroleum (OAS), and Pioneer Natural Resources (PXD) are few companies who would with benefit from the loosening of the export ban. It’s important to note that most of these companies are a part of the Energy Select Sector SPDR ETF (XLE).

In this series, we’ll discuss the factors that have led to the loosening of the export ban and the effects that it will have in the oil industry.

There are no shortcuts to investing.

But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.

The Realist Discussions

GC

Some arguments contradict one another. You state “Even if the refineries do handle light oil, they would make less profit”. Yet condensate trades at a discount to WTI, and a significant discount with Brent. Many refiners are already blending condensate into their feedstock, and are making significantly more profit when they sell or export finished products.

Kshitija Bhandaru

Importantly, refiners try to come up with the best crude mix
to maximize profits given a set of product prices. Refiners choose their inputs
based on prices and what they want to produce.

Refiners blend condensates into their feedstock as long as
condensates are justifiably priced given what products they can yield. But
condensates yield lighter products like naphtha and gasoline. These products
are less valuable due to growing demand for heavier distillates like diesel.

If any input (like condensate) becomes more expensive,
refiners will move to the next most optimal blend. Allowing condensate exports might
remove the “excess” availability of condensates, raising prices. If
condensate prices increased enough to make them unfeasible as a feedstock
blend, refiners would decide whether to still include condensate in their
feedstock.

Refiners can’t determine the effect of this price change on
feedstocks based on the price change alone. The decision depends on several
other factors, including condensate prices, other input (crude) prices,
refining configuration, and prevailing product prices. But, all else being
equal, a price increase for an easily available input (condensate) should raise
refiners’ feedstock cost. This, in turn, should compress refiners’ margins.

Plus, if the government also loosened export bans
incrementally for U.S. crude, the effect on refiner profitability would be more
direct. The Brent-WTI spread would narrow. This would reduce the advantage U.S.
refiners currently enjoy.

To help us personalize your experience, which of the following best describes you?

Financial Adviser

Investment Professional

Individual Investor

What is the approximate total amount of the assets under your advisement?

Less than $25 million

$25 million to $99 million

$100 million to $499 million

$500 million or greater

What is the approximate amount of your firm's total assets under management (AUM), if applicable?

Less than $25 million

$25 million to $249 million

$250 million to $999 million

$1 billion to $9.99 billion

$10 billion or more

Don't know

Not applicable

What is your total amount of investable assets?

Less than $25,000

$25,000 to $99,999

$100,000 to $249,999

$250,000 to $999,999

$1 million or greater

Prefer not to say

Thank you!

x

There are no shortcuts to investing.

But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.

We think so too.

There are no shortcuts to investing. But if everyone had access to the trade secrets the top 10% of hedge fund managers use, their retirement path to wealth would be clearer. Enter your email address to discover how in our Market Realist Chronicles newsletter. You’ll receive must-know market insights straight from our former hedge fund manager, who managed $1 billion and made $2,000 an hour in the market, and his team of unbiased professional analysts.

Customize your experience.

Complete your registration by adding a password and customizing your Market Realist experience. You’ll quickly create a watch list to track the stocks and ETFs that matter most to you and your portfolio.